India looks to US in struggle to boost FDI, revive rupee

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Economists say it is critical for India to boost FDI because the long-term nature of the investment has a more stable influence on the economy. On the other hand, the fickle flows of portfolio investment can have a destabilising impact.

India looks to US in struggle to boost FDI, revive rupee

Economists say it is critical for India to boost FDI because the long-term nature of the investment has a more stable influence on the economy. On the other hand, the fickle flows of portfolio investment can have a destabilising impact.

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India looks to US in struggle to boost FDI, revive rupee

Economists say it is critical for India to boost FDI because the long-term nature of the investment has a more stable influence on the economy. On the other hand, the fickle flows of portfolio investment can have a destabilising impact.

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Finance Minister P Chidambaram is in the United States this week to drum up investment from the likes of Lockheed Martin, leaving behind a cabinet far from convinced about his plans to revive the economy and a record low rupee.

Chidambaram won investor approval last year for plans to rein in fiscal deficit but he is struggling to push through proposals to relax rules on foreign direct investment (FDI) in defence, telecoms, pharmaceuticals and retail.

Economists say it is critical for India to boost FDI because the long-term nature of the investment has a more stable influence on the economy. On the other hand, the fickle flows of portfolio investment can have a destabilising impact.

In June alone, USD 7 billion in portfolio investment fled the country amid a wider emerging markets selloff over concerns that the United States was preparing to rein in its monetary stimulus.

The rupee hit a record low of 61 per dollar on Monday and is the worst performing emerging markets currency in Asia this year of those monitored by Reuters daily.

It is under pressure from India's weakest economic growth in a decade and a record high deficit in the current account, the broadest measure of a country's international trade, of 4.8 percent of GDP last fiscal year.

To try to revive FDI, which has fallen in three out of the last four fiscal years, Chidambaram last month mooted plans to loosen investment for foreign companies in a broad swathe of industries. He had hoped to secure cabinet approval this month.

He flew to the United States on Monday for meetings with the CEOs and other top executives of potential investors, including Microsoft Corp , Wal-Mart Stores Inc , Lockheed Martin International and Boeing International . He is due to return to India on July 14.

Just ahead of the trip to persuade the US companies to invest in India, two ministries leaked letters outlining their opposition to the latest FDI plans. One ministry also briefed journalists about its disagreements with the finance ministry over the proposals.

"Retrograde step"

In one letter, the Defence Minister AK Antony, a powerful member of the cabinet, told the industry ministry a plan to allow foreign weapons manufacturers to invest up to 49 percent in defence joint ventures represented a danger to India's defence interests.

"Allowing foreign companies to set up manufacturing/assembly facilities here will be a retrograde step," Antony said in the letter, an excerpt of which was seen by Reuters. He said the cap on foreign investment in defence companies should remain at 26 percent, except in special cases.

The home ministry wrote a letter late last week to Commerce and Industry Minister Anand Sharma, who oversees foreign investment policy, saying any new proposals in telecoms, defence and space research should take into account security concerns, an official told Reuters.

Industry ministry officials have also privately raised objections, saying a plan to raise the cap on foreign ownership in supermarkets to 74 percent was unnecessary.

Rajeev Malik, a senior economist at brokerage CLSA, said some pushback from the ministries was to be expected, but that it was important for the government to follow through.

"It should not have raised hopes if it was not totally sure, and most importantly it should not have started talking if it could not deliver, because now is the time to actually deliver, not just talk," Malik said.

Since last year, when a retail cap of 51 percent was put on overseas ownership, no foreign supermarket has committed to India. Foreign retailers complain that some rules, such as on sourcing food and consumer goods, are too stringent.

On Monday, a senior government official involved in investment policy said the retail cap set last year was now unlikely to be changed.

"I think the decision on raising FDI cap in multi-brand retail may be deferred as part of the compromise among ministries," said the official, who asked not be identified because he was not authorised to speak to the media.

New urgency

With a general election due by May 2014, Prime Minister Manmohan Singh faces a tight deadline to push through economic reforms he says are needed to revitalise Asia's third-largest economy. The opposition has the power to disrupt parliament and so stymie the government's efforts.

In the past year, the government has successfully loosened FDI rules in retail, civil aviation and broadcasting to attract more overseas funds.

Still, government data shows that in the last four fiscal years FDI only rose once, in 2011/12. In the latest fiscal year that ended in March, it fell 21 percent to USD 36.9 billion.

Analysts say the root of the rupee's drop - nearly 9 percent against the dollar so far this year - lies with the current account deficit.

Concerns that capital flight from emerging markets will pick up as the US Federal Reserves gets closer to reining in stimulus are adding urgency to India's need to close the gap.

Net portfolio investments in India slumped to just USD 50 million in the three months to June from USD 11.3 billion in the quarter ending in April, data from market regulator SEBI and published by ratings agency CRISIL shows.

The finance ministry has already taken measures to ease pressure on the current account, including hiking tariffs on imports of gold, the main contributor to the deficit after oil.

Chidambaram has toured financial capitals in recent months to try to drum up investment, including with sovereign wealth funds.

"Unless the business environment in the country improves, it would not be realistic to expect strong flows from sovereign funds," said an official involved in the approval of many foreign investment proposals.

Officials, who a few weeks ago were upbeat about the response to the roadshows, are now more gloomy.

"We are trying our best in the given circumstances. But the fall in the rupee and delay in policy reforms could affect our credibility," a senior official at the ministry of finance said.